An Evaluation of Overseas Oil Investment Projects under Uncertainty Using a Real Options Based Simulation Model
AbstractThis paper applies real options theory to establish an overseas oil investment evaluation model that is based on Monte Carlo simulation and is solved by the Least Squares Monte-Carlo method. To better reflect the reality of overseas oil investment, our model has incorporated not only the uncertainties of oil price and investment cost but also the uncertainties of exchange rate and investment environment. These unique features have enabled our model to be best equipped to evaluate the value of oil overseas investment projects of three oil field sizes (large, medium, small) and under different resource tax systems (royalty tax and production sharing contracts). In our empirical setting, we have selected China as an investor country and Indonesia as an investee country as a case study. Our results show that the investment risks and project values of small sized oil fields are more sensitive to changes in the uncertainty factors than the large and medium sized oil fields. Furthermore, among the uncertainty factors considered in the model, the investment risk of overseas oil investment may be underestimated if no consideration is given of the impacts of exchange rate and investment environment. Finally, as there is an important trade-off between oil resource investee country and overseas oil investor, in medium and small sized oil investment negotiation the oil company should try to increase the cost oil limit in production sharing contract and avoid the term of a windfall profits tax to reduce the investment risk of overseas oil fields.
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Bibliographic InfoPaper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2011.83.
Date of creation: Nov 2011
Date of revision:
Overseas Oil Investment; Project Value; Real Options; Least Squares Monte-Carlo;
Other versions of this item:
- Lei Zhu & ZhongXiang Zhang & Ying Fan, 2011. "An evaluation of overseas oil investment projects under uncertainty using a real options based simulation model," Economics Study Area Working Papers 121, East-West Center, Economics Study Area.
- Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
- Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- O13 - Economic Development, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
- O22 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Project Analysis
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-01 (All new papers)
- NEP-CMP-2012-02-01 (Computational Economics)
- NEP-CWA-2012-02-01 (Central & Western Asia)
- NEP-ENE-2012-02-01 (Energy Economics)
- NEP-PPM-2012-02-01 (Project, Program & Portfolio Management)
- NEP-SEA-2012-02-01 (South East Asia)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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